In this specification where a document, act or item of knowledge is referred to or discussed, this reference or discussion is not an admission that the document, act or item of knowledge or any combination thereof was at the priority date publicly available, known to the public, part of the common general knowledge, or known to be relevant to an attempt to solve any problem with which this specification is concerned.
While the current invention will be described with reference to day to day commercial transactions in the retail sector, such as purchase of goods by a customer in a department store, it should be understood that the invention is not so limited but applies to any transaction involving the use of a chip card which requires user authorisation. Furthermore while the invention will be described with reference to a ‘customer’ this term is not limited to members of the public unrelated to the merchant but includes anyone involved in dealing with the merchant including employees, suppliers and associates of the merchant.
Types of Return Fraud
One of the major sources of loss for merchants around the world is fraudulent and abusive returns. Refund fraud is a system that allows a customer to refund merchandise and profit from the return. In the US alone, approximately 9% of returns are considered fraudulent, costing merchants $16 billion annually.
The most common method of refund fraud involves stealing merchandise from a store then returning it using fictitious customer information. Thieves also “shoplift” at stores by obtaining a discarded receipt, then shoplifting the items listed on the receipt and returning the shoplifted items for a refund. The fraudulent party can thus receive cash for a purchase that was never made. Some stores require the customer returning the item to fill out information including name, address, and telephone number. However this does not necessarily prevent fraud as anyone can give false information and receive a cash refund.
Second, it is known for customers to appropriate receipts from previous sales by other parties and use them to process refunds at a later date. These transactions are typically in the form of cash, but can also be completed using credit cards. In some businesses, depending on the procedures followed, customers may be able to process a fraudulent refund even without a receipt.
Third, customers can buy merchandise at sale prices and then return the merchandise after the sales have finished and receive a full price refund. In most instances the receipt is not required for this technique to be accomplished. The customer can bring an identical item to the register and use that particular item for the refund process. Like most refund frauds, cash is the most commonly preferred form of refund because it does not leave a paper trail.
Fourth, over half of returns fraud is estimated to be due to customers “renting merchandise for free” by legitimately purchasing a product, for example an expensive camcorder, using it once to record a wedding or graduation, then returning the merchandise for a full refund a few days later. A full refund is given and the merchandise has lost quality, value, and a potential true sale.
Fifth, the method of stealing a product or merchandise at one store and returning it to a different store is a widespread problem among chain stores. A customer steals items from one store and has access to receipts or shopping bags with the store's logo, which are used to make the transaction appear legitimate. The customer returning the stolen merchandise merely states they have lost the receipt but because the original price tags are intact the retailer will pay a refund.
Refund Fraud and Chip Cards
Bank cards are often at the centre of returns fraud schemes. Presentation of a credit or debit card by a customer returning goods tends to lend an appearance of legitimacy to the transaction. Thieves have been known to purchase items using stolen credit or debit cards, and then return the items for a refund on another bank card. In other cases, thieves have broken into shops and used the merchant's payment terminal to refund hundreds of transactions using stolen debit cards, which were then immediately used to withdraw cash at ATM machines.
In response to growing bank card fraud, card providers are investing heavily in upgrading their payments infrastructure to cope with chip card technology. Chip technology helps eliminate bank card fraud while at the same time reducing the cost of authorization by allowing a certain number of transactions, or a cumulative transaction value, to be performed off-line without the need for a costly authorization request at every transaction. Chip card technology is designed to ensure that the person using the card is indeed the legitimate cardholder, through the chip's PIN verification feature. However, the technology is not specifically designed to identify fraudulent returns using bank cards, especially fraud such as customers “renting” merchandise for free.
Prior Art Attempts to Counter Return Fraud
Faced with a rapid increase in returns fraud, merchants have had to improve their procedures for detecting and dealing with fraudulent returns while maintaining good customer service. Merchants are increasingly adopting stricter refund and exchange policies. Proof of purchase, in general the sales receipt, is often required. The receipt also indicates the form of payment so that an appropriate refund can be made (credit to payment card or bank account, restoration of value to gift card, refund of cash.) Many merchants establish a time period within which a return will be accepted, especially concerning products with a short life cycle such as fashion or seasonal items. The merchant's return policy will usually indicate whether and under what conditions the merchant will provide a full monetary refund, a store gift card or credit note, or a product exchange. In an effort to discourage fraud, increasing numbers of merchants offer to mail a cheque to the customer. Most merchants will also indicate whether the name, address, phone number and a form of photo identification may be required to complete the transaction.
A known method of using technology to address returns fraud and abuse in a consistent and automated manner is to create a central database and associated service to authorize return transactions. These methods use a combination of rules and predictive statistical modelling to identify potentially fraudulent or abusive returns before the returns are accepted. A unique customer ID, such as a driver's license number or passport number, is entered into a credit card POS terminal along with information concerning the returned merchandise. The POS terminal sends the information to the central host and waits for a message indicating approval or rejection of the transaction.
This method has drawbacks. The procedures described above are intended to prevent the estimated 2% of returns transactions which are fraudulent or abusive, but risk penalizing the estimated 98% of customers that return merchandise in good faith. Some customers object to the potential loss of privacy, especially if the central service is able to compare the customer's returns activity across multiple merchant categories. Some countries are in the process of implementing strong privacy laws which could make the operation of such a database more complicated for merchants. Furthermore, such solutions are expensive to operate, and merchants must eventually pass the expense on to their customers, either by charging a specific fee to customers returning merchandise, or by bundling the costs into their general overhead, which in essence passes the expense on to all customers.
As indicated, returns fraud costs US merchants alone US$ 16 billion annually, much greater than the US$ 3 billion loss due to bank card fraud. Therefore there exists a clear need for a quicker, less obtrusive system for identifying return fraud which can be implemented using existing infrastructure. In particular there is a need for a system that takes advantage of existing infrastructure based on chip card technology, which was designed to counter bank card fraud.